An insurance policy is one of those things you know you must have for your restaurants and/or food-service operations. But, when it comes to losses following a severe storm, hurricane, or other natural disasters; policyholders commonly ask “what’s covered and what isn’t?” Business insurance policies will usually specify that they cover “direct” and “physical” losses in the case of damage caused by a storm or hurricane, but not necessarily “indirect” losses. It’s very important to be aware of what these terms mean and what their policies actually cover.
Here’s a list of definitions of insurance lingo to get you started:
“Direct” loss, often referred to in insurance language as “perils,” refers to damage immediately inflicted by the disaster. If a hurricane strikes and takes the roof off your building, your direct loss would include damage to the structure itself, as well as to equipment, furniture, inventory or other items that were damaged as a result. However, be aware that some direct causes of loss are often excluded from a standard property policy, namely flood coverage. Most flood insurance is purchased as a separate policy, through the National Flood Insurance Program (NFIP), and/or private insurers. To further complicate matters, flood deductibles are often higher than the standard property deductible. Questions may also arise following a hurricane damage loss, as to what damage was caused by flooding or storm surge, and what was caused by wind.
Insurance policies commonly require a loss to be “physical” to be covered as a direct loss, but don’t define the word “physical.” Building damage, for example, is a pretty cut-and-dry physical loss, but grey areas are everywhere. Consider the following: A hurricane knocks out power to a restaurant and all the food in the coolers goes bad. Not only is it unclear whether the spoilage is a direct loss, it’s also debatable whether the power outage loss is “physical” because the building itself did not sustain any damage from the hurricane. Because policies don’t define the word “physical,” it’s been left to the courts to sort out what does and doesn’t qualify as a direct “physical” loss and surprisingly there’s little consensus on
“Indirect” losses, often referred to in business insurance policies as “consequential” losses, are not inflicted by the storm itself, but are losses you suffer as a result or consequence of the direct loss. Business interruption is the most obvious example. If a hurricane blows the roof off your property, not only do you face the cost of rebuilding, but your business can’t operate until the damage is fixed. The income you lose during the rebuilding and after, if customers remain with the alternative they found while you were rebuilding, represents an indirect loss.
So, What’s Covered?
Business insurance policies almost always cover “direct” losses, but the truth is that the “indirect” losses can often be more damaging to your company. While you might be able to recover from the loss of a roof, losing several months’ worth of income as a result could put you out of business totally.
Review your policy with your insurance broker and find out if you have business interruption coverage as part of your policy that will cover potential indirect losses. If you do, which you certainly should; make sure that it is enough. Your business interruption value is calculated using revenue from the most recently completed 12-month financial period. Most value worksheets use a deductive approach, taking annual net sales plus other earnings from business operations minus certain non-continuing expenses. If your company is in a period of rapid change, you should update your business interruption values more than once per year.
Other important time element coverages for indirect losses that restaurant owners should strongly consider purchasing include civil authority, dependent properties and off-premise service interruption. A comprehensive review with your broker will determine what constitutes a “physical loss” according to your policy and which additional coverages, or policy limits, you need to adequately protect your operations.